Why government plays a role in economic development

Government plays a vital role in the regional economy. There are solid reasons for public sector involvement in economic development, including:

Spillovers. The market will produce too much when private sector buyers and sellers overlook negative spillovers, such as pollution, and too little when they overlook positive spillovers, such as the overall gains for a region from investments in education and training.

Information market failures. Free market theory assumes buyers and sellers have perfect information about all elements of production, employment and consumption decisions. Reality often falls short of that ideal.

Existing but underused capacity. If public infrastructure or private resources are left idle, a community misses out on the economic potential of those existing investments.

Social impacts. Growth can have long-term positive impacts on the economic well-being of places and people, especially less-educated, low-skilled individuals.

Political pressure. Economic stagnation or decline prompts demands from voters for economic development action – good or bad.